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| September 19, 2014 |
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| Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 27,090.42 | 29.38 | 0.11% | | Re/US$ | 60.85 | 0.08 | 0.13% | | Gold Rs/10g | 26,950.00 | -370 | -1.35% | | Crude ($/barrel) | 97.24 | 0.04 | 0.04% | | FD Rates (1-Yr) | 8.00% - 9.00% | Weekly change as on September 18, 2014
*BSE Sensex as on September 19, 2014 |
Impact 
There may not be any economic boom at any corner of the world at present; yet investor sentiments seem to be getting stronger by the day. Policy interventions and geopolitical scenario seem to be drawing a different landscape. While the changing global landscape may not affect your daily life directly, it can have an impact on your investment portfolio during the period of 'risk-on'.
Gush of global liquidity...
You see, the European Central Bank (ECB) recently announced a new stimulus package to stave off deflationary pressure and create jobs. The U.S. on the other hand, being fairly satisfied with the signs of economic vigour, reduced the quantum of stimulus (to U.S. $15 billion per month) which led to expectations that the U.S. Federal Reserve may hike interest rates soon. However, contrary to the expectation, rates were kept unchanged in the recently held policy meeting and it was pledged to keep interest rates near zero level for a 'considerable time' being wary of the repeated concerns over the slack in labour market. In China, in a move addressing to potential liquidity crunch in their banking system, the People's Bank of China (PBoC) has planned to inject U.S. $81 billion (about 500 billion Yuan) in 5 largest banks of the nation.
So, the accommodative stance adopted by the central banks of the world has aided in building a period of 'risk-on'.
The changing geopolitical landscape...
The Scottish separatists have been demanding a status of a separate nation to Scotland, while at present Scotland is a part of the the United Kingdom. Separatists have made a case for their independence arguing that they hardly received any share in North Sea oil; while the British Government has managed to earn millions of pounds out of tax revenues from the oil boom in this region. On similar grounds, the Islamic State of Iraq and Syria (ISIS) has also eyed oil reserves in Iraq and Syria.
Speaking about developments on India's cross border relations, Indo-Sino tie-up are falling in place as recently both nations signed mutually beneficial trade pacts. But the expectation of U.S. $100 billion investment in India by China has been dashed as the country now commits itself to only $20 billion here over five years. You see, as incursion from Chinese troops also occurs the same came up for talks during Chinese President Mr Xi Jinping's meeting with Prime Minister Mr Narendra Modi.
Japan has also committed to bringing U.S. $35 billion to Indian shores.
It is noteworthy that, U.S. $55 billion investment by Japan and China is 5.13% of the U.S. $1.07 trillion which the Confederation of Indian Industry reckons, but would aid in better infrastructure for India over the over the period 2014-19. You see, growing business interest among these three major Asian economies has a potential to change the investment climate across the globe.
Now in the backdrop of global liquidity and changing global landscape, you may be wondering where to invest hard earned investible surplus. Well, herein below is the impact on the three major asset classes...
Impact on equity: More foreign investments in Indian infrastructure may help economy grow rapidly. However, waggeries of international oil prices may play a spoilsport as India imports oil nearly 80% of its requirements. In other words, global cues may affect fundamentals of economies. Having said this, as long as central banks of the world continue to be accommodative in their stance (to aid their respective economies) and there is gush of liquidity, it would be favourable for Indian equities as foreign investors would evince interest in economies which have the potential to go on a high growth path. However that being the case, the Indian equity market would be vulnerable to foreign flows in the backdrop of global macroeconomic environment and geopolitical situation as well.
Impact on debt: The bond prices would take their cues from interest rates across the globe, which at present have received robust foreign investment. But the demand for Indian debt would also be guided by domestic factors such as fiscal deficit, trade deficit, inflation and growth momentum. So, watching these domestic macroeconomic variables will be imperative.
Impact on gold prices: You see, usually a weak U.S. dollar triggers rallies in gold. But now that the U.S. Fed has decided to keep rates near to zero for a considerable time the U.S. dollar could witness some weakness. Also given the backdrop that global headwinds are to be seen and geopolitical tensions in some regions persist, it could be supportive for gold and therefore smart investors may take refuge under the precious yellow metal.
PersonalFN is of the view that, investment environment will always be dynamic. Therefore, it is imperative to make a valid assessment of the same when it comes to investing your hard earned money, although you may be an aggressive investor - willing to take high risk. It would always be prudent to diversify your portfolio to minimise risk involved and tactically follow an asset allocation plan based on your risk appetite and considering your financial circumstances. PersonalFN has a specialised team that can help you tactically allocate assets for you and help you plan for your financial goals.
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Impact
As markets are strong and the investors' sentiment is robust, mutual fund houses have been launching a number of New Fund Offers (NFOs). While most of them are 'copy-paste' of older funds with a few modifications, there are some new launches of their own kind too.
What's new?
JPMorgan Mutual Fund and Kotak Mahindra Mutual Fund have launched new funds that endevour to invest predominantly in equity arbitrage opportunities. These funds would have a flexibility to invest a certain portion equities, debt and cash & equivalent assets. In simple words, they are equity arbitrage oriented hybrid funds with flavour of debt.
Should you invest in them?
Following the shift in taxation on long term capital gains in case of debt funds, mutual fund houses have tried to give investors an alternative to generate tax efficient returns. Since predominant portfolio i.e. more than 65% would be either in hedged equity arbitrage opportunities or in un-hedged equity; from a taxation angle they would be treated as equity funds. But, the returns clocked by the arbitraged component of the portfolio would be comparable to those made by liquid and liquid plus funds nonetheless superior to those generated by Monthly Income Plans (MIPs) on a post-tax basis if equity component does well.
PersonalFN is of the view that, although there is some uniqueness in new offerings, it would be worth waiting till these funds establish a dependable track record. If at all, you want to try out new hybrid funds, PersonalFN suggests you to limit your exposure to about 5% of the entire portfolio.
Do you think new hybrid funds capturing arbitrage opportunties can beat Monthly Income Plans (MIPs) on post-tax returns? Share your views
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Impact 
Investors have been bullish on India as they hope that performance of corporate Inc. would revive and economy would make progress at a faster pace. Foreign money is flooding Indian markets. Over last one month, Foreign Institutional Investors (FIIs) have brought in nearly Rs 11,300 crore to Indian shores. Even the domestic retail investor has been investing actively in equity markets. However, performance of the industry measured by the movement of Index of Industrial Production (IIP) has dented hopes.
After rising at an average of 4.2% in the April-June quarter of Financial Year (FY) 2014-15, IIP growth slipped to just 0.5% in July. Weaker growth in manufacturing, sluggish performance of mining due to seasonal factors and moderate growth in the electricity sector brought the industrial growth down. Having said this, IIP data for the month of June has been revised upwards from 3.4% to 3.9%.
Is growth cooling off?
(Source: CSO, PersonalFN Research)
Manufacturing growth declined by 1.04% this July as against the positive growth of 2.99% in July 2013. In June 2014, the manufacturing activities grew by 2.69%. Performance of manufacturing industries remained lacklustre. Out of 22 groups of industries, 12 have witnessed positive growth.
To check how India is paced and read PersonalFN's outlook on Indian Rupee, please click here.
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Impact
Inflation measured by the movement of Wholesale Price Index (WPI) eased to 3.74% in August 2014 placing it at 5-year low. This was a sharp fall from 5.19% recorded in July 2014 and even 6.99% in August 2013.
A reduction in prices across categories led to WPI inflation mellow down further. Inflation in food articles, declined to 5.15% in August 2014 from 8.43% in the month prior. Likewise, prices of primary articles to reported a decline to 3.89% from 6.78% in the month prior... and so did fuel & power inflation which eased to 4.57% in August 2014 from 7.40% in month prior. Similarly, sluggish price rise in manufactured products (which has a weightage of nearly 65%) and slower growth in energy prices (which has weightage of nearly 15%), kept a lid on WPI inflation.
To read more about this news and PersonalFN's views on it, please click here.
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- Usually, regulators such as the Securities exchange and Board of India (SEBI) and Reserve Bank of India (RBI) interrogate market players on various matters. But this time, regulators are being quizzed by lawmakers for actions they have taken to avoid repeat of serious frauds such as Saradha scam that swindled eastern India. The parliamentary standing committee on finance conducted a meeting recently to know how efficiently regulators are regulating to save thousands of investors of chit funds and collective investment schemes.
PersonalFN has repeatedly warned investors against ponzi schemes and chit funds. One shouldn't get carried away by the tall claims by the operators of such schemes. As these schemes are not tightly regulated, there is always a chance of losing money when dubious claims are made. Having said this, lack of access to bank facilities, low penetration of mutual funds and lack of awareness among investors about pitfalls of investing in ponzi schemes pose a threat to investors. Therefore, it is imperative that, investors are aware about benefits and dangers of investing in particular investment avenue.
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Arbitrage: The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.
(Source: Investopedia)
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Quote : "The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate." - Benjamin Graham
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